It was over a year ago that we first published our relatively tongue-in-cheek look at the “real-world” impact of rising mortgage rates on property values in San Francisco. The basic premise: property values are affected by the purchasing power of buyers.
In essence, and overly simplified, in early 2005 a home buyer in San Francisco with a $150,000 down payment and an appetite for a $3,500 monthly mortgage payment could afford a $750,000 purchase (assuming a mortgage rate of 5.75%). A year later and with rates at 6.72% that same buyer could afford a $695,000 purchase. And with a mortgage rate of 7.5%, this same buyer can now afford a $650,000 purchase (13.3% less than in 2005).
The million dollar question: will property values fall to offset this decrease in purchasing power? Of course we abhor the practice of valuing assets (yes, even “homes”) on a leveraged basis. And as far as we’re concerned it’s a rookie mistake. But hey, that’s an even bigger conversation for another time. And yes, that time will come.
∙ From Gain To Loss In Just Three Short Months? [SocketSite]
Has anyone seen this article on the NY Times? Jumbo mortgages at 13%….Gee, I think that’s going to affect the market.
http://www.nytimes.com/2007/08/12/business/12mortgage.html?_r=3&hp=&pagewanted=all&oref=slogin&oref=slogin&oref=slogin
anon at 12:15pm:
You forgot this part of the article:
“In the end, he was able to get a mortgage with a lower interest rate, but it will adjust in five years, possibly to a much higher level.
The size of the rate increase he faced is unusual. But all jumbo lenders have raised rates. Bankrate.com reports that conventional 30-year mortgages cost about 6.23 percent now, less than they did a few weeks ago, due to a decline in Treasury bond rates. But the average jumbo rate is now 6.94 percent. The spread between the two rates rose from less than a quarter of a percentage point to more than two-thirds of a point.”
He got something lower than 13% (though it adjusts) and the average is quoted as 6.94% for a jumbo in the article.
I think we’re about to see a reversal of the “upper end of the market will hold” phenomenon. Lenders cannot sell jumbo mortgages — the more jumbo, the more difficult to sell. This may or may not be irrational, but with the B.S. that has been slung about the absence of risk in the CDO markets in recent years, it is no surprise that participants in the secondary markets would be running from any nonconforming product. We are going to see much more depreciation in market values at the high end in the near future than at the median or low end. Cash buyers will be able to make out, but the other 90% of buyers of higher-end properties are largely out of the game for a while because they are not going to take out big loans until jumbo rates settle down.
Yes, but why were the rates so high at 13%? Perhaps, he did not have enough money to put down? In that case, I’ve got to believe that the $1M+ homes in SF would be affected, unless of course you have a sizable amount of cash to put down.
Rising interest rates are the very definition of inflation. This means that gas, bread, eggs, people’s incomes, and yes houses become more expensive with time. If you look at the 80s when interest rates were 13%, houses were appreciating by leaps and bounds.
This is simple Econ 101.
OMG. You are funny Mr. realtor. So you are saying with exploding interest rates, we should expect to continue with skyrocketing home prices as well? Really? And how will people afford these homes, when food and gas prices rise too?
Regarding the comment about the 80’s and housing prices increasing by “leaps and bounds” during periods of high interest rates, the rise in housing prices in CA has been a lot steeper in the 2000’s than in the 1980’s. And, interest rates were high in the 80’s – but they were generally declining year over year.
The environment and, at last, buyer sentiment have finally changed. Now prices need to reset to a much lower level.
If you accept the premise that historically low interest rates and relaxed lending standards were the primary underlying factors causing housing prices to rise so sharply during the 2003-2006 period, it only stands to reason that higher interest rates and more restrictive lending practices are going to be factors that tend to erode housing prices.
More generally, it seems to me that any theory offering a prediction of why prices are (or are not) going to fall in the near future also needs to account for why prices have risen so significantly in the near past.
Relating the price of housing to the relative ease/difficulty and relative cost of leveraging housing does a fairly good job of accounting for why prices rose so much and why (in my humble opinion) they are likely to fall.
Is it possible that SF RE was significantly undervalued prior to the big run-up and this is at least part of the reason for the large increases (in addition to lending standards, etc.)?
“Rising interest rates are the very definition of inflation.”
Uh, no, inflation is loosely defined as the situation where core goods required by a society (food, shelter, etc.) increase in cost at a higher rate than society’s ability to pay for them. Put simply, cost of living goes up faster than incomes. Bay Area housing has suffered from hyper-inflation during the past few years and needs to be deflated to line up with local incomes.
Craig: In a word, no. Rents and incomes would have reflected that, and they did not.
To reflect on Craig’s question a bit more, I think that in the early part of the run up that is now unwinding, in the late ’90s, SF housing was undervalued. I and many others I know paid far, far less for places in 1999 (when rents were skyrocketing from dot-com bubble populations) than it would have cost to rent, factoring in all costs and tax benefits. That is certainly not the only measure of “true” housing value, but this P/E-type measure is a valid metric. The purchase-rent ratios have been way out of whack ever since about 2002, however. Unless you want to argue that the historical correlation between rents and housing costs in an area have always been way off, I think you have to conclude that something other than inherent value has driven up home prices in recent years. ARMs, interest-only loans, etc. are a pretty good suspect.
So, the early part of the run-up was SF catching up to it’s “true” value, and the later part was due to ARMs, subprime, etc. I would add that others factors have contributed to a lesser extent to the later run-up as well e.g. US dollar weakness, solid economy, job growth, etc.
My prediction: Housing will more likely than not come down in value in SF, though values are still holding fairly steady for the moment. Rents are soaring right now and may well continue to do so. I think it is quite likely that the ratio between mortgage and rents will meet again, but they will not meet half-way, i.e. rents will do the majority of the gaining.
If it gets to difficult to get a jumbo loan, they’ll raise the definition of what a jumbo loan is. Just my 2 cents.
Sorry … I hit “post” too quickly.
The fact is that in California, we have almost always been in the”jumbo” loan category regardless of what the current definition of what a jumbo loan is. This was not the case is states such as Florida, Arizona, Oregon, etc. I am more concerned by the percentage of loans in the US that are now in the jumbo category and how the lending system needs to correct itself for this fact.
There is some talk of government sponsored mortgage buyers being allowed buy higher value (more than $417K) mortgages but only if the buyers have very good credit scores and at least 20% down. If Fannie Mae can go to 500-600K that would help some, but most buyers will still need a big chunk of cash for a down payment. What is odd about this tightening is that Alt-A has been in many high priced markets since well before the latest housing runup. The banks are not going to allow the S.F housing market to shut down, there is too much money to be made from all of those interest payments.
On the other hand, if jumbo loans remain restricted, this could put lower priced S.F. properties in a better position and perhaps even encourage some lower priced developments.
Craig and Garrett – you’re both wrong. Here’s why.
1. Do the math – for rents to increase to the point where it’s a wash between owning and renting, a 1-bedroom in the city would have to rent for nearly $4,000/month at current prices. Manhattan is cheaper than that with a better job base. People will leave this city in droves before rents make up the difference, which will push rents back down. A substantial portion of the condos being built in SoMA right now will turn into rentals, and start driving rental prices down next year. So sure, maybe we do get back to a normal cap rate and equilibrium between owning and renting. But rents won’t do all the work. 2/3 of the city rents, at a cost much below owning today, and rents are historically fairly static in relation to incomes.
2. Fannie Mae and Freddie Mac lobbied the OFHEO and regulators for this already. Verdict came back last week, and the answer was no. Jumbo limits are set once a year and they’re not being increased until the next reset. The last reset took them from $400K to $417K, so don’t think that $700K loans will be conforming by next year. OFHEO does not want GSE’s taking on this level of risk.
Caps on Fannie Mae remain….
http://www.marketwatch.com/news/story/fannie-freddie-stocks-fall-after/story.aspx?guid=%7BB2D8B9C4%2D5059%2D4576%2DB4B8%2D923FE0054FCB%7D
Dude,
The Fed controls the money supply and raises interest rates to control any inflationary concerns they may have with the economy. i.e. they raise rates to control inflation.
I know it may sound counter intuitive to people, but in a rising interest rate environement, prices for goods and services (including land and income)go up. They do not go down. Over the short term they may adjust down due to other factors, but definitely not in the long term. I would not post here if I did not feel confident in making this statement.
Paul
It’s interesting that a discussion that seemed to me at least to be about questioning whether prices will fall because of the impact on potential borrowers of higher interest rates and more stringent lending standards has evolved into a discussion about how the current high price levels prices might be supported by expanding the definition of conforming loans so that more borrowers can afford and offer support for the current high prices.
Rather than adjusting the 417k non-conforming level upwards to reflect and support current price levels, my own preference is to see the current obscene price levels adjust downwards in response to realistic and sensible lending standards (e.g., borrowers can only borrow what they can reasonaby afford to service and repay) and current and more normal interest rates.
Just my two cents. (Full disclosure: I am a non-owner and I am not in the industry)
“1. Do the math – for rents to increase to the point where it’s a wash between owning and renting, a 1-bedroom in the city would have to rent for nearly $4,000/month at current prices. Manhattan is cheaper than that with a better job base. People will leave this city in droves before rents make up the difference, which will push rents back down. A substantial portion of the condos being built in SoMA right now will turn into rentals, and start driving rental prices down next year. So sure, maybe we do get back to a normal cap rate and equilibrium between owning and renting. But rents won’t do all the work. 2/3 of the city rents, at a cost much below owning today, and rents are historically fairly static in relation to incomes.”
I didn’t say that rents would rise to the point that they meet current monthly mortgage payment levels. Just that rents (non-rent controlled) will do more gaining than monthly mortgage payments will do falling (due to falling housing values). I know plenty of people already paying 3K/month for a nice 800-1000 sq ft 1bd/1ba w/ parking. (I also know plenty of people paying >2-2.5K for small studios w/ no parking in Manhattan as well, think
Paul, you may feel confident in making your statements, but you don’t know what you’re talking about. It is true that among the many tools available to the Fed to control inflation is to raise short-term interest rates. But that does not mean that “in a rising interest rate environment, prices for goods and services (including land and income) go up.” You’ve got cause and effect backwards. Moreover, the current interest rate pops on jumbo loans have nothing at all to do with any Fed action — it has not raised rates. The problem is that nobody is buying these mortgages, and thus banks aren’t making them except at higher rates.
To argue that higher borrowing costs will cause higher home prices is absurd.
Trip –
Finally, someone who knows what they’re talking about. Yes, the fed raises interest rates to control inflation. Higher interest rates do not cause price increases, but rather, has the opposite affect.
OK, maybe I could have worded it better. The bottom line is that there is inflation and that rising interest rates are a reflection of that.
These are facts and not in dispute, correct?
The hypothesis port forth is that everything is going to become more expensive (Food, rent, incomes, etc.), except for Real Estate Prices?
If so I disagree.
I think Paul the realtor is essentially arguing that when interest rates rise, inflation rises, and that has generally meant home prices have risen, case in point the astronomical inflation and home price increases of the late 70s and very early 80s.
But the mid to late 70s saw women entering the workforce in droves. Households had 50-100% more to spend. And that allowed people to compete for houses by outbidding anyone who bid an old price for a home. Then, inflation started rising and employers merely followed the inflation curve, rather than trying to contain it. With household spending booming, it was more important to keep your market share anyways, than keeping your wages in line.
This is drastically different. We have a Fed who will keep inflation low. And the increase in interest rates is not being driven by a spike in household income and consumption, which would drive up the costs of everything else, it is being driven by the supply of investor’s money exiting the market in anticipation of an enormous price fall (if prices were going to rise forever, investors would not be so worried).
Instead of bidding more on all types of products because households have more to spend, as long as the fed keeps inflation in check, households will not have any more to spend. If something costs more, they will substitute out of it or something else. If people continue to purchase houses at bubble prices using bubble mortgage rates, they will buy less of other things, causing prices of those other things, and therefore wages, to fall.
What is being lost here is not that jumbo mortgages are up in price, it’s that Jumbo mortgages now require 20% down and a fantastic credit score. I don’t think an extra $200-300 per month is going to keep buyers away in droves. What WILL keep them away is the fact that last week, anyone, and I do mean ANYONE, could buy a $1M home. This week, only those with 740 FICO scores and $210,000.00+ in the bank get to buy them.
And THAT is going to keep demand down until Americans who want to buy houses A) improve their credit scores and B) save $210K.
Until that happens, and it may never happen, prices fall to the equilibrium point where investors are comfortable making loans to people. The same house at $500K would help equalize the market: it would only require a $105K downpayment with a 740 score, making more people eligible. An even lower price would help more. Where the equilibrium price is, who knows, but it isn’t todays prices by a mile. And if people pay more for housing, they’ll buy less, and prices and therefore their wages, will fall. And without that inflation, home prices aren’t likely to rise in tandem.
“…the rise in housing prices in CA has been a lot steeper in the 2000’s than in the 1980’s.”
Actually, the annual percentage increases in prices were greater in the 1988 and 1989 run up than in the 2004 and 2005 run up.
Of course, the after 1989, prices were down for several years.
Dude: I stand by my statement. The Jumbo loan amount will be upped if money becomes tight. (It wasn’t happening now and they didn’t move it … that doesn’t refute my point.)
I am however extremely concerned by the percentage of folks now getting jumbo loans do to the overly easy qualifications. That is the problem. Jumbos have a significantly high risk as there are no guaranteed purchasers. In the past, the California market reflected a high level of the overall jumbo pool. That is not the case any longer. Just about every market has a high percentage of people going for jumbos in order to get into a property. That risk will need to be balanced out: in the short term by high rates. In the longer term, expect to see a much tougher requirement (like the traditional 20% down and fully documented loan).
No offense Paul, but you’re either a bit confused on the the relationship between interest rates and inflation or the variances between the way different commodities are impacted. If I’m being too elementary here I apologize.
Inflation is caused by too many dollars chasing too few goods. Low interest rates encourage the use of credit, thereby contributing to the amount of money chasing the fixed number of goods. Increasing interest rates discourages the use of credit, dropping the amount of money being spent on the same number of goods. I.E., prices go down.
Does it increase the net cost of buying a specific house? Yes. Does it increase the value of that house? No. A business may be able to pass along the additional expense of having to borrow money at a higher rate to the consumer if that business is milk or gasoline (an essential good) but not if that business is automobiles, which is why automobile manufacturers respond to interest rate increases by offering discounts, rebates or their own financing.
The same holds true for houses unless you’re arguing that a house is a necessary purchase, like buying gas. Otherwise, if you want to sell houses in a higher interest rate environment you will probably need to offset the additional borrowing costs faced by the buyer by lowering the cost of goods.
The idea of inflation seems to be misunderstood here. Will prices of everything, including real estate, keep going up? Likely, but irrelevant. Do incomes support it? That’s the core concept. It’s a relative, not an absolute, analysis.
For a given amount of purchasing power (be it dollars or wampum or heads of livestock) how much can I consume today vs. yesterday? If my currency buys less today than five years ago, inflation has occurred and my standard of living is lower. That’s what the government is trying to prevent.
Real estate appreciation over the last few years has had little to do with normal course inflation, which is expected in a growing economy. Google “Minsky credit cycle” for more insight.
“1. Do the math – for rents to increase to the point where it’s a wash between owning and renting, a 1-bedroom in the city would have to rent for nearly $4,000/month at current prices.”
Are you taking into account tax deductions for mortgage interest credit? I don’t think so. I have a 30-year fixed loan at about $2400/mo, and property taxes and HOA dues that bring my total to about $3800/mo. When my tax credit is figured in, though, I’d have to find an apartment for $1850/mo or lower before I would start to see a financial benefit from renting vs. owning. And, I would never find an apartment of equal caliber to my home for that price. Rather, comparable units in my building rent for around $3000/month.
OK…if you don’t mind us asking, then, when did you buy and what did you pay? Can a buyer today get the same deal as you? Same financing rate?
seehsee-
There are a lot more variables in this equation than
those you’ve listed. Down payment (that’s part of your costs), closing costs, HOA fees, investment returns on savings…. The NY Times published the slickest rent vs buy calculator around back in April with almost any variable you can think of. And I suspect that most people in SF would find that, on a financial basis only, renting is very attractive. You probably need to be a Select subscriber to get to it now but if you can it’s worth a spin.
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html?ex=1180929600&en=1e49505eb2e5b922&ei=5070
I’ll bite, Dude. I just bought (closed in June). I put 20% down on a $625K two-bedroom. I have an interest rate of 7.25% (high interest loan b/c it’s a TIC). Out the door every month I pay about $4400 (that’s principle, interest, property taxes, insurance, and HOA). In my income bracket, I expect to get about $1100 of that back every month.
The place across the street from me just rented for $3250 per month, and it’s a new building with no rent control (!). The owners had their pick of tenants– they had two open houses that attrected dozens of people each. The apartment is similar in size and amenities to mine. I figure I’m doing pretty well.
So yes, rising rents must be factored in to the equation. Maybe the pool of buyers will get smaller, but the own/rent ratio for San Francisco isn’t too bad right now. If I had a fabulous rent-controlled apartment that I loved I probably wouldn’t move right now, but since I wanted to move into a bigger/nicer place I’m glad I bought.
My two cents – much of what happens in SF depends on what happens in surrounding counties.
Everyone here is arguing that the income to real estate price equation is out of whack, which it is – but it’s never going to be the same as a Houston or Atlanta where land is still readily available. If redevelopment was as easy as greenland development, we might get back to some equilibrium, but because it’s always much harder and more expensive to redevelop (the actual cost of tearing down and cleaning up that property is one cost, but the BIGGER cost are the costs associated with the POLITICS of redevelopment – every NIMBY issue you can think of), and we are OUT of greenland within the core Bay Area, we’ll never get back to equilibrium without a MASSIVE economic downswing in the metro.
Seehsee, your numbers are not accurate, even if we assume that your entire $2400/mo payment goes to interest, you would not get anything close to the $1950/mo tax credit you state. HOA dues are not deductible at all. And even if you are in the absolute highest income tax bracket, you can’t deduct 50%+ of your mortgage and property taxes.
I’m still looking for a post from one of the ORH or Infinity cheerleaders. Why? Well I would love to know whether any of those folks have any sort of rate lock assurances. A good friend of mine purchased last summer (back when loans were easy) and bought an 850k condo with 20% down, and a 30year fixed jumbo for 6.5%. Their rate lock was for 60 days from the date of lock (wells fargo loan), after which point each 15 days extra of lock was a quarter point ($2200). That was during a relatively calm interest rate period. Alternatively, he could have had 6.25% 10/1 ARM with a 6 month rate lock. With jumbo rates rsing quickly, what is happening to those who put their money down for a deposit on one of the ORH or Infinity residences? I would love to hear from them because 1.) they may be fine in that the secondary mortgage market may settle and the risk premium for jumbos may return to lower levels allowing for lower jumbo mortgage rates 2.) they may have rate locks on short-term ARM mortgages (nobody does long rate locks on 30 or 15 year fixed loans unless the buyer pays huge points up front) in which case they are bearing the risk of resetting rates in a few years 3.) they are not worried because they bought with a cushion for higher rates built into their analyses 4.) they are screwed and looking to back out.
Any new development buyers willing to chime in – we’re curious. And for the record, I’m not a bear or a bull on this real estate cycle, we could be in a down market for 1 month or 20 years, no one knows, and it’s a fools game trying to predict it (did you wake up on 9/12/2001 and think, gee I should buy a lot of real estate, or better yet on 9/10/2001 would you have guessed that one of the worst days in American history would spawn a huge real estate boom courtesy of the Fed’s easy money policy?) If you can afford your purchase and love it, you should jump in, if you think you are timing the market and making an investment, well you will probably get what’s coming to you…
“What WILL keep them away is the fact that last week, anyone, and I do mean ANYONE, could buy a $1M home. This week, only those with 740 FICO scores and $210,000.00+ in the bank get to buy them.”
My reply is directed at this comment and Trips post at 12:27.
1) You can still get a 90% stated income loan up to a price of 1.25mm with a 680 fico for less than 7.5%. (7 yr fixed fully amortized or interest only) You can go much higher with a 20%/25% down payment which most buyers in this range have. The rates on these products for the most part have only increased about 1/2%. Although 1/2% is not insignificant, it is much less than many of the hyped up claims in the media.
2) Most experts are puzzled by the increase in prime Jumbo rates (made to borrowers with good credit) as the default rate on these is very low.
Quoting from the SFChronicle sunday business section – “In May, only .5 % of prime jumbo loans were 60 or more days delinquent, compared with 1.2 % for conforming prime loans and 16.3% for subprime. In a few weeks, markets may settle and the jumbo rates may return to normal levels relative to conforming mortgages”.
3) Lenders always tend to overreact when adjusting rates during unexpected events. This time will be no exception. Sub prime is a different story, but it is a very small % of the San Francisco market. Conforming rates have acutally come down the past few weeks, that will help although I believe the percentage in SF is something like 22% conforming and 78% Jumbo.
This isn’t really directed at the real world impact question, so in answering that question I would say that for most markets, this increase would by itself have a very marginal impact on housing prices. Rates have already increased more than a full percent from their lows of a few years ago, and that hasn’t caused any measurable drop in home prices. I would argue that other factors, including the local economy and job base, supply factors, schools and desireability of certain neighborhoods vastly outweigh small movements in interest rates in determining pricing.
Subprime is a seperate issue and there are many markets that are suffering right now becasue of those mistakes, and many borrowers that were (and are still to be) priced out of their homes due to much larger percentage increases in their mortgage payments. These markets are seeing double digit price drops as a result and it could be argued there will be some spillover effect and a certain economic drag, but the markets will handle it and SF especially will be just fine.
I can’t resist a second comment too. The realtors here, who I admire for having the guts to post in an open forum while the rest of hide behind our pen names, need to take Econ 101 again.
Jumbo rates are NOT rising due to inflation – interest rates have 3 components 1.)the real rate, 2.) expected inflation, and 3.)the risk premium.
Real interest rates have remained relatively constant over the past year, and expected inflation has actually fallen a bit, but the risk premium on certain kinds of loans (subprime, and now jumbo prime loans) has risen markedly. Why – because banks can’t offload their risk in the form of a collateralized debt obligation to a secondary market such as a hedge fund. No such problem exists for conforming loans (
I’ll second jeccat.
We also just bought: 20% down on a $875K fully-remodeled 3/2 in a pretty nice neighborhood. Our interest rate is 7% (TIC with a fractional loan = safe, but higher rate). We pay about $5500 a month (principle, interest, property taxes, insurance, and HOA) and will get about $1300 of that back every month.
We looked at renting in the neighborhood and similar flats (1500sft+, with garage parking, private outdoor space etc.) were going in the $4000s plus.
If had a rent-controlled unit which would fit my growing family, I could certainly see the benefits of staying put and investing elsewhere.
But we’re sick of 800sq/ft, love (and can afford) the new place and are not planning on moving in the next 5+ years. For us a good move, but maybe not for everyone.
A real question is, what portion of the market would use cash (funded by nice stock options etc), or pay big portion of the purchase with cash?
You can only deduct mortgage interest of the first 1MM loan, so it doesn’t really make sense to carry loan higher than that. In addition, it is much more difficult to get a loan with amount higher than 1MM (it has been like this, before the subprime crisis). With so many 2MM and 3MM properties in the city, I really doubt people are using 2MM or 3MM loans.
I think in the 2MM+ market, at least a big portion of the purchase are funded by cash, so the impact of mortgage rate on the purchase power get reduced.
Also, keep in mind it is a free market. In the 2MM+ segment, I doubt any homeowners are in a hurry to sell, so they can ride it out. We already see the inventory number below 2006 since beginning of 2007 in SF. I have the feeling the demand at high end is lowered a little bit because of high mortgage rate, but the supply is also lowered a little bit because potential sellers want to wait it out, so we end up little price change.
It’s true that rising rates are often a response to rising inflation. The spike in jumbo loan rates, however, is something completely different – it reflects an increase in the market’s assessment of the risk associated with these larger loans. NOTE THAT REGULAR MORTGAGE RATES ARE FALLING ALONG WITH THE 10-YEAR BOND YIELD. In other words, the general level of long-term interest rates is FALLING, not RISING. I personally have no idea whether inflation will go higher or lower from here, but I can tell you that Wells Fargo deciding that it does not want to offer jumbo loans or alt-A loans does not reflect panic on their part that housing prices are going to go too high too fast.
P.S. From what I gather, these jumbo loans are riskier because the initial lenders can’t repackage them and sell them to Fannie Mae or Freddie Mac, which they can do with regular loans (under $417K).
jeccat,
Just running thro’ your numbers (correct me if I am wrong):
625K – 20% down – 125K
7.25% for 500K
25% tax bracket
Interest/month: 3020 after tax: 2265
property tax: (1.25%?): 650 after tax: 487
Insurance:(no tax ded) after tax: 150 (approx)
HOA:(no tax ded) after tax: 500 (approx)
total: 3402$
savings interest for 125K(5.5%): 6875 (572) after tax: 429$
so total per month: 3830$
Since the rents are around 3250$, you are losing around 600$ a month, which is quite reasonable as long as you are happy living there. But for someone buying right now, same situation, I think they probably have to pay around 8%(especially for TIC) and that will have them losing 1000$ every month. As long as the home prices appreciate, this is an OK loss, else losing 12K(after tax) per year is a lot..
I don’t know what all the fuss is about. 30-yr fixed jumbos are at 6.5%. Go call Citimortgage or Bank of America. Also, i am VERY frustrated as there’s nothing ‘reasonable’ on the market, and i constantly see overbid and prices very uneasonable to me. Anybody see 289 Marina Blvd? Asking $2.795 mil, and sold for $3.7 million = $1,340/sqft. Ouch.
I’m sure I’ll get flamed for this, but I still strongly believe that prices in SF proper will not drop by more than 10% before they start rising again. Some neighborhoods may depreciate more than 10%, but others will hold or even continue to rise.
Interest rates on Jumbo loans have increased because of the Mortgage backed security debacle. While that has some obvious relationship to the housing market and depreciation, it has more to do with poor investing (similar to the dot-com crash) and market volatility. Interst rates will drop over the next few weeks, and the spread between jumbo and conforming will become much more normal. Most experts who’ve weighed in on this have said the same thing.
Exotic mortgages will definetly be more expensive and unattainable for a while, and I think that’s a good thing. For buyers with access to a down-payment and verifiable income (and most in SF fall in that camp), things really won’t change that much. That’s just my two cents, and I’ll guess will see what really happens over the next few months.
Interest/month: 3020 after tax: 2265
property tax: (1.25%?): 650 after tax: 487
Insurance:(no tax ded) after tax: 150 (approx)
HOA:(no tax ded) after tax: 500 (approx)
total: 3402$
savings interest for 125K(5.5%): 6875 (572) after tax: 429$
so total per month: 3830$
Since the rents are around 3250$, you are losing around 600$ a month,
—-
I am in a very similar position. Do all the math you want, sure paying more money now, but owning a place to live, where you want to live is worth much more to an individual then $600 dollars a month. Everyone is trying to justify this when they should be moving on with there lives, it sucks that real estate is so high, but move.
I don’t doubt that loans are being offered (though e-loan’s rates and yours are wildly different at 90%), but the difference is, last week, you didn’t have to prove your income. Are you a painter, a secretary, an auto mechanic, fireman, or a hundred other professions and do you want $1M, no problemo last week. This week, no dice.
As for being puzzled about why the jumbo primes are out of service, I’ll help to enlighten you. Say you are a mortgage investor and you need cash. Your options are to sell your sub primes at 30 cents on the dollar, or sell your jumbos at 85 cents on the dollar. So you sell your jumbos. 85 cents isn’t that bad.
Now someone else is an investor. But this investor is buying. He has two choices, he can make jumbo loans and get them for 100 cents on the dollar, or he can buy the first investors jumbos at 85 cents on the dollar. Which does he choose? The right answer is “it depends on the interest rate.” For 10%, I’ll take the new ones. For 7%, I won’t buy any new ones, I’ll buy the old ones I can get at 6.5%, but I only pay 85 cents on the dollar, so that boosts the rate I get back up.
I just have to say that you gotta love Socketsite. The population decreases, they build more housing, funny loans dry up, interest rates on mortgages that apply to SF go up, while they drop for mortgages the rest of the country uses, renters magically appear from nowhere driving rents up but not, if you listen to people here, dropping out of the housing market, and prices always go up: through good times, bad times and disaster times, nowhere but up. The secondary loan market completely dries up, Washington Mutual warns, things get so bad that the fed opens the discount window only to buy mortgages from teetering banks, something I don’t believe has ever occurred, mortgage companies continue to go out of business, funds that invest in mortgages go bankrupt, or halt redemptions, yet mortgages are still SOO easy to get if you listen to people here.
This really is a magical world.
I gonna respond to somebody up there who mentioned that the early run up was caused by undervalued homes…
okay…here is the BIG joke:
The early run up was caused by dot.commers making a fortune in another BUBBLE…
Let’s see…if a stock was once worth $200.00 in the late 1990s and is now worth $20.00 and if one owned 100,000 shares one could buy a home for $2million. Oh, but at today’s stock prices, that same home is worth, what? $200,000!
The home already depreciated…
Oops…forgive my explanation…
If someone owned 100,000 @ $200 shares it would be very easy to pull 10,000 shares to buy a home for $2m. But, if the stock is now @ $20 a share…the home is worth $200,000
That is the reality of every single dot.commer who bought in the late 1990s. They got a deal of their life!
I don’t follow mortgage rates, but I can tell you the 10-year Treasury has dropped about 50 basis points from mid-June to now. The credit spreads are widening…. I doubt the relationship between 10-year Treasuries and mortgage rates really apply when the credit spreads are widening out after being WAY too thin for single-A and lower rated corporate debt.
woee, go check out bankrate.com. Jumbo rate loans for 30 year fixed with 20% down are not 6.5%. Depending on the points, they are as high 9.9%. This was assuming a loan of $620k.
289 Marina – I have seen this on other real estate blogs. Who knows what the story is behind that sale. One example does not mean that the SF market is still on fire.
I’d like to learn more about 289 Marina too. Looks like irrationality still exists in this market. A million dollars over list price – are you kidding! Guess they didn’t get the message that prices are coming down.
Maybe the realtor was one of So Cal’s ‘Super-Jenae®’ type realtor’s pumping up prices
http://bubbletracking.blogspot.com/2007/08/sex-vitamins-108-million-of-flops.html
Current Jumbo rates for a prime borrower – 7.125% – 1 pt – 30 yr fixed or 6.5% – 1 pt – 15 yr fixed. The 5, 7, and 10 yr fixed are all in this same range.
anon @ 11:45PM – Why do say they are “as high as”?
When you check these web sites, do you seek out the highest rates possible, or the lowest? Are you a prime borrower? Rates are much lower than what you are saying, just check around a bit.
Market neutral: you are close, except my HOA is $380, property taxes are 1.13%, and insurance is closer to $60/month. So take at least $360 off your estimate every month.
I am also not counting the 5% interest I could get out of a high-yield saving account, because about 60% of my down payment was not mine– it was borrowed from parents. I don’t know about your family, but mine wouldn’t give me access to their savings for anything other than a home purchase. So for me, buying was also a way to invest someone else’s capital– a little extra leverage, if you will ;-).
The rent vs. own debate has occurred on this site many times before, and as with other such debates, each camp can find numbers and approaches to support either position. Bottom line: for those in a financial position where ownership can present a huge tax savings, we may also have discretionary income where a $1000 or so monthly premium to be an owner vs a renter is negligible. Although it can’t be measured in mere numbers, I derive important, personal quality-of-life value from ownership that I would not gain from renting at a comparable or lesser monthly cost.
This has indeed been covered ad nauseum. And this time, like the last 50 times, an empirical, mathematical analysis clearly shows that it makes little FINANCIAL sense to buy today. Whether it’s back of the envelope math or the NYT model. We always end up with the same resolution: “Well, I love my place and get warm & fuzzies from owning, so I don’t care what the numbers say.”
I’m not trying to be mean, but it’s honestly a dfferent analysis for those of you who bought pre-bubble or got a windfall from the bank of mom & dad. The point I repeatedly try to make is that current incomes don’t support current prices. Not without inheritance, exotic loans, pre-bubble equity, or 10%+ annual future appreciation.
If you love your place and can afford it, that’s fantastic – enjoy it. But please don’t try to push the financial merits of owning over renting in this market – it’s a weak argument that’s been dispelled several times.
and to support dude’s point….
http://www.forbes.com/home/media/2007/07/20/unaffordable-housing-property-forbeslife-cx_mw_0723realestate.html?partner=aolre
If
1. Rents continue to rise (as they are now)
2. The Jumbo market returns to normal
it seems quite likely (i.e. better than 50/50)that the difference between renting and owning will close substantially in SF over the next 3-5 years as housing prices slow, plateau or dip. I think most rational people would agree that the above variables are likely to occur. Other variables are more difficult to predict, future interest rates and job growth, for example.
“I’m not trying to be mean, but it’s honestly a dfferent analysis for those of you who bought pre-bubble or got a windfall from the bank of mom & dad. The point I repeatedly try to make is that current incomes don’t support current prices.”
And there, my friend, I agree with you 100%. No single approach to home ownership is the blanket right answer for everyone. We come to the table with different resources, needs, and priorities. If I were entering the market today with my current income and the abilitiy to make no more than a 20% down payment on a $600,000 property, I wouldn’t buy either.
I don’t think there’s anyone trying to say “buy or die trying” (except for some of the realtors). But there are a LOT of people on this board saying that buying is the dumbest thing you can do in this market. Those of us who bought– for whatever reasons– are just trying to provide a little counterpoint to the market crash cheerleaders.
jeccat said:
I am also not counting the 5% interest I could get out of a high-yield saving account, because about 60% of my down payment was not mine– it was borrowed from parents.
So it was an interest free loan… I hope you are not making more than $1,000 per year from investment income or else your parents will be liable for imputed interest on the loan.
See http://www.hrblock.com/taxes/tax_tips/deductions_credits/family_loans.html
For loans up to $100,000, the IRS won’t get involved as long as the borrower’s investment income is less than $1,000. If it goes over $1,000, the forgone interest to be reported by you and deducted by the borrower is limited to the amount of the borrower’s investment income.
www2.gsb.columbia.edu/faculty/cmayer/Papers/superstar_cities_final.pdf
Maybe, it’s not so bad here?
The price of a house is equal to:
The rental value +
the value of being able to do what you want to it +
its expected appreciation.
And that last number is why rent vs. buy numbers are so out of whack (unless you exclude bank of mom and dad).
If houses are expected to DROP in value, that last number goes negative. And it can offset the second value, to the point that rent vs buy makes it cheaper to buy on a monthly basis, but of course, when you sell, you’ll be out of luck. So I FULLY expect the rent vs buy analysis will invert.
As people’s expectations are reset, you’ll find that people would rather not lose their life’s savings, and mom and dad won’t be too happy if you lose theirs either, and will be much less likely to hand over the cash when prices are falling.
Expected appreciation:
When I sell my place in 20 years, prices are going to be 240% higher than they are now (based on SF’s average annual apprecation of 4%+ for the last 60+ years). Why in the world would I sell (even if I move) when I can rent the unit out to someone so they can pay my mortgage. Even if I am out of pocket a bit for the time being so what? I can afford to hold my property indefinitely…and someday it will be paid for entirely and producing a huge monthly cashflow.
Expected appreciation:
When I sell my place in 20 years, prices are going to be 280% higher for me because I didn’t jump in right before a 10-20% correction.
When the housing price went up, some of us were crying that the way to calculate inflation was not fair. It only counts rent data, but the housing price was not used.
In one sense, the inflation has already been high for the last five years, but not reflected in the numbers.
Well, as the housing price fall, the extra money in the system (which caused this sub prime crisis at the first place) will have to go somewhere. I think we are facing high inflation for the coming years, and this time, the number will reflect it.
I’d further question the widely stated assumption above that owning a condo/TIC/house provided a convenience yield. Suppose I own (I currently rent) and my job relocated out of SF, I got divorced, etc. I would need to sell the property, paying a commission to a broker, at the prevailing market rate. The commission itself could be crushing in a low HPA environment.
Moreover, a simple read of craig’s list shows that it’s not too hard to rent in the major condo projects, at least. Renting also has the advantage of not leveraging one’s net worth 20:1 or more (risk of ruin).
It was not long ago (mid 1990s – 2003) when renting was more expensive than buying because there was both a barrier of entry in terms of raising the down payment. This barrier to entry might return with the signficant tightening of mortgage standards.
Well, as the housing price fall, the extra money in the system (which caused this sub prime crisis at the first place) will have to go somewhere.
Err, no. The money didn’t exist – it was all just debt. Debt deflation will cause the money to… just… disappear. ‘Cause that’s how deflation works, you know.
I think buying with one of the City’s second mortgage downpayment options is pretty darn smart right now. Where else can you get $85k or more for 0% (assuming everybodys tales of home price depreciation come to fruition, eliminating the City’s cut of appreciation in price when the property is sold or paid off)?
Just wondering fellow renters, what are you doing with your disposable income? I ask b/c I am getting crushed in the stock market, and I’m pretty shaken by the recent move. Stock market going down, don’t think i can get a loan if I wanted one… I donno. Having cash is ok, but kinda pointless.
“Err, no. The money didn’t exist – it was all just debt. Debt deflation will cause the money to… just… disappear. ‘Cause that’s how deflation works, you know.”
Wrong.
Banks gave subprime loans because they didn’t find anyone else to loan to, and they still have big amount of money. That money exists and still do.
Whattodo,
“Having cash is OK but pointless”
Ironic you would make that comment when the turmoil in the market has been caused by a LACK of cash in the markets. (Too much leverage)
You could do what Buffet and Icahn are doing, use your cash to buy stocks (when there’s blood in the streets).
If you’re a young man, with a long investment horizon, your expected return will probably exceed your dreams.
Cary
Dude, your appreciation will be higher if you buy at a lower price, but the time to achieve your 280% appreciation will be further off by the amount of years that you wait. Plus interest rates are substantially higher now than they were a year ago. If prices go down 10%, it is totally negated by the 1.25%+ higher interest rate than what people paid in the last year or two.
I did the NYTimes rent vs buy calculator, and compared to renting the same unit in my building, there is a 5-year breakeven period. So now I only have 3+ years to wait until I am better off than renting.
If you can time the reale estate or stock market, good for you. 95% of people can’t!
“what are you doing with your disposable income? ”
Cary is right about buying low and holding for the long run. If you’re looking for a safe haven in the meantime, try money markets or CDs. Everbank (www.everbank.com) offers CDs that are FDIC insured and indexed to commodities or foreign currencies. Returns are around 5-6% on many instruments.
“Banks gave subprime loans because they didn’t find anyone else to loan to, and they still have big amount of money. ”
Really? Then why did they sell all those loans?
And why, after they can’t sell those loans, did the loans start to dry up?
The debt flushing through the system from hedge funds leveraging their holdings 10x is going away – that’s debt deflation. It will bring all asset classes down in price, just as all previous debt deflations have – the only question is, how much?
“If prices go down 10%, it is totally negated by the 1.25%+ higher interest rate than what people paid in the last year or two.”
While I agree that if you have an ROI of 5 years, you should absolutely buy, it’s important not to forget that you can (almost) always renegotiate for a lower rate later, but you’ll never get to get a lower principle amount once you’ve paid it.
Fortunately, I’m south bay, so the answer for me is easy – most properties don’t pencil out for 20 years, never mind 5. I think that for mid-range and higher SF places (which is what this site is about), the answer is a bit more murky, and I’ve certainly had folks here make a compelling case for purchase in SF right now (though maybe not with the current interest rates, which are liable to be transitory).
Good story in the Wall Street Journal today about S&P, Moody’s, and Fitch’s roles in fanning the flames of the subprime mortgage meltdown. These are private companies at the end of the day, and their incentive is to make more money for shareholders/partners.
From the WSJ:
=================
When Wall Street first began securitizing subprime loans, rating firms leaned heavily on lenders and underwriters themselves for historical data about how such loans perform. The underwriters, in turn, assiduously tailored securities to meet the concerns of the ratings agencies, say people familiar with the process. Underwriters, these people say, would sometimes take their business to another rating company if they couldn’t get the rating they needed.
“It was always about shopping around” for higher ratings, says Mark Adelson, a former Moody’s managing director, although he says Wall Street and mortgage firms called the process by other names, like “best execution” or “maximizing value.”
====================================
I continue to have the opinion that mortgage brokers need to be regulated like securities brokers and held to a higher standard (one that would motivate them to say no to an applicant who has no business buying a home with their current financial position).
“”Banks gave subprime loans because they didn’t find anyone else to loan to, and they still have big amount of money. ”
Really? Then why did they sell all those loans?
And why, after they can’t sell those loans, did the loans start to dry up?”
Look at the other side – who bought those loans? Eventually it is either hedge fund (private investors), big fund familiest (still private investors), or foreign banks (including the Chinese banks).
Why did they buy them? Well, where else would they put the money?
Why did they stop buying them? Isn’t that obvious? I cannot believe anyone would ask this question – with any investment (stock, RE, or anything), people shy away when it goes down, jump in when it goes up.
Believe me, there is enough money in the system (both US and international) and they need to go somewhere. It used to be VC (and .com) and stock market. When the market crashed in 2000, it went into RE. With RE crash, it will go back to business investment again and we will see significant inflation pressure (why do you think the Fed won’t lower the rate no matter what)?
When people say with the 2000 stock market crash, people take the money out and put into RE market. That’s only part of the stock. When the stock market crashed, big investors tooke the money out and put into mortgage market, which caused the RE bubble.
From Dataquick’s just released #’s for San Francisco:
Sales Median Price
07/06 07/07 chng 07/06 07/07 chng
542 564 4.1% $775,000 $799,000 3.1%
Sales up, Median price up. I guess the “real world” impact of rising rates has yet to be felt?
Don’t worry about 289 Marina. The house will pancake on them in the next earthquake and atleast one of these irrational people will DIE!
Dataquick’s numbers only show one thing: that high-end homes in SF are selling, even if at a slower pace. Those 10% of people are NEVER going to be effected by paying an extra few $k/month.
Given the low inventory, one can even argue that the high end home sales are lower because of low supply.
http://sfgate.com/cgi-bin/article.cgi?file=/c/a/2007/08/16/BU3DRJ9RU.DTL
Econ 101.
Paul, I know that your job depends on moving properties, and I want you to make a very good living, but I wonder if you’ve even read the article you’ve posted. Quote 1: “The median rose because a greater proportion of expensive homes were sold, said Andrew LePage, an analyst at DataQuick.” Quote 2: “‘The same house a year ago would have sold for a greater amount over the asking price, but in this market we did pretty well getting three offers,’ Phillips said.”
I must say that I have tremendous respect for Kate Phillips, the quoted realtor, for not continuing to sling the crap that “there is no better time to buy, the market is HOT.” I will seriously consider using her if I ever look to buy or sell.